Question 1

When the United States sells products to China, US exporters often demand that they be paid in the Chinese yuan.

Accepted Answer

US exporters typically prefer to be paid in US dollars because it is the currency of their home country, reducing the risk associated with exchange rate fluctuations.

Question 2

The International Monetary Fund offers both loans and free grants to countries depending on the stability and need of the borrower.

Accepted Answer

The International Monetary Fund (IMF) primarily provides loans to countries for balance of payments problems and does not offer free grants.

Question 3

A deficit in the current account does not have to be balanced by other financial accounts.

Accepted Answer

A current account deficit represents an excess of imports over exports and leads to a net outflow of currency from the country, which must be balanced by inflows from other financial accounts such as capital account or financial account. Therefore, a deficit in the current account must be balanced by other financial accounts. A deficit in the current account means that a country is importing more goods and services than it is exporting, resulting in a negative balance. In order to finance this deficit, the country may have to borrow from other countries or sell assets to foreign investors, creating a surplus in the financial account. Therefore, by definition, a deficit in the current account must be balanced by other financial accounts.

Question 4

Even though a country may have a high currency risk, the country might still be worthy of investment.

Accepted Answer

Currency risk is just one factor to consider when evaluating an investment opportunity. Other factors such as the country's economic growth potential, political stability, regulatory environment and market conditions may override the impact of currency risk. Therefore, a country with high currency risk may still present attractive investment opportunities. A high currency risk does not necessarily mean the entire country's investment prospects are poor. Other factors such as the country's economy, political stability, and investment opportunities can outweigh the currency risk.

Question 5

Only managers in financial firms have to worry about foreign exchange issues because non-financial firms are immune to risks of changing currencies.

Accepted Answer

Non-financial firms can also face risks related to changing currencies if they engage in international trade or have operations in multiple countries. Exchange rate fluctuations can impact their revenue, cost of goods sold, and profits. Therefore, non-financial firms also have to worry about foreign exchange issues. Non-financial firms that engage in international trade or investment are also exposed to risks associated with foreign currencies, such as changes in exchange rates affecting the price of imports and exports or the value of overseas assets and liabilities. It is important for them to manage these risks through hedging or other strategies to ensure stability and profitability.

Question 6

The current account balance consists of exports, minus imports of merchandise and services, plus income on US assets abroad, minus payments on foreign assets in the United States, plus unilateral government transfers and private remittances.

Accepted Answer

This is an accurate definition of the current account balance. This is the correct definition of the current account balance.

Question 7

The gold standard propelled the US dollar to commanding heights in the global economy.

Accepted Answer

The answer of The gold standard propelled the US dollar...

Question 8

Purchasing power parity is the price of one currency in terms of another.

Accepted Answer

Purchasing power parity is a theory that suggests that exchange rates between currencies should adjust to equal the price of a basket of goods and services in different countries. It is not the price of one currency in terms of another. Purchasing power parity (PPP) is a theory that states that exchange rates between two currencies should be at a level that makes the purchasing power of each currency equal. It is not the price of one currency in terms of another.

Question 9

The rise of a country s productivity is usually accompanied by increased demand for its home currency.

Accepted Answer

When a country's productivity increases, its economy grows and becomes more attractive to investors. This leads to an increase in demand for the country's currency as investors want to invest in the country's economy, which requires purchasing the country's currency.

Question 10

The foreign exchange market has no central physical location but operates 24/7 and is the largest and most active market in the world.

Accepted Answer

The foreign exchange market is a decentralized market that operates 24/7 through a global network of banks, brokers, and electronic trading platforms. It is the largest financial market in the world, with a daily trading volume exceeding $5 trillion. The foreign exchange market is decentralized and has no physical location, but it operates globally 24/7 and is the largest and most active financial market in the world.

Question 11

While theories on PPP, interest rates, and money supply give often-accurate predictions about long-term movements, investor psychology is regarded as the determinant behind short-term movements.

Accepted Answer

While economic theories provide insight into long-term movements, short-term movements are often influenced by investor psychology and sentiment. This statement is generally accepted in the field of finance and economics. While economic theories can provide insight into long-term trends, short-term fluctuations are often driven by the emotions and behavior of investors.

Question 12

Strategic hedging means spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through gains in other regions.

Accepted Answer

Strategic hedging is a risk management strategy wherein companies spread their activities across multiple countries and currency zones, in order to balance out any potential currency losses in certain regions with gains in others.

Question 13

Smaller, internationally inexperienced firms sometimes outsource currency hedging to specialists such as currency traders.

Accepted Answer

Smaller, internationally inexperienced firms may lack the knowledge and resources to effectively manage currency risk, so they may outsource this task to currency traders or other specialists. Smaller firms without international experience may choose to outsource currency hedging to specialists who can help them manage their foreign exchange risk. Currency traders are often hired for this purpose.

Question 14

Governments that believe in a free market approach usually adopt floating exchange rate policies.

Accepted Answer

A free market approach typically means that the government does not intervene in the exchange rate and allows the market forces to determine the value of the currency. This is achieved through a floating exchange rate policy. Governments that believe in free market principles prefer to leave exchange rates to be determined by market forces, and hence adopt floating exchange rate policies. This is because they believe that free markets allocate resources efficiently and can self-correct any imbalances. In contrast, governments that believe in managed exchange rates may intervene in currency markets to influence the value of their currency.

Question 15

Currency hedging is a popular way to minimize the foreign exchange risk inherent in all nonspot transactions.

Accepted Answer

Currency hedging involves taking countermeasures to reduce the risk of loss due to currency fluctuations in nonspot transactions. It is a popular way to minimize foreign exchange risk.

Question 16

A large number of individuals and companies exchanging domestic currencies for US dollars in order to exit their home country is referred to as capital flight.

Accepted Answer

This is true. Capital flight is the movement of assets out of a country, usually as a result of political or economic instability or uncertainty. This can include individuals and companies exchanging their domestic currency for US dollars or other stable currencies in order to protect their assets and exit their home country. This is the definition of capital flight.

Question 17

The Bretton Woods system was formed at a conference in England.

Accepted Answer

The Bretton Woods system was formed at a conference in New Hampshire, United States in 1944. The Bretton Woods system was formed at a conference in Bretton Woods, New Hampshire, USA in 1944.

Question 18

Under the gold standard, every central bank needed to maintain gold reserves in order to be able to redeem its currency in gold at a fixed price.

Accepted Answer

This is the fundamental principle of the gold standard system, where the value of a nation's currency is directly linked to the amount of gold held in its reserves. Central banks were required to back their currency with gold, ensuring that it could always be exchanged for a fixed amount of gold, typically at a rate of $20.67 per ounce during the period of the classical gold standard.

Question 19

Since foreign exchange is such a unique commodity, its markets are influenced only by economic factors and are free from the effect of social or political pressures.

Accepted Answer

Foreign exchange markets are influenced not only by economic factors, but also by social and political factors such as changes in government policies, political unrest or natural disasters. These factors can affect the supply and demand of currencies, leading to fluctuations in exchange rates. Foreign exchange markets can be influenced by social and political factors, such as changes in government policies or political instability. These factors can cause fluctuations in currency values and impact foreign exchange trading.

Question 20

It is only crucial that managers pay attention to long-run movements informed by PPP, productivity changes, and balance of payments because short-run fluctuations always even out.

Accepted Answer

Short-run fluctuations in exchange rates can have significant impacts on a company's profitability, competitiveness, and supply chain. Ignoring short-term fluctuations can lead to missed opportunities or unexpected losses. Therefore, managers should pay attention to both short-run fluctuations and long-run movements in foreign exchange rates. Short-run fluctuations can have significant impacts on a business, such as changes in exchange rates or sudden shifts in consumer demand. Ignoring these short-run movements can lead to missed opportunities or unexpected risks. Therefore, while long-run trends are important to consider, managers must also pay attention to short-run fluctuations.

Quiz 7: Dealing With Foreign Exchange